Seven-year property plan would transform economy
Ten years since the madness began in 2004, now is a good time to take stock -- and action
SO HERE it is, 2014 is upon us and an economic recovery is in full swing. Or is it?
As one minister put it, the question is not whether the economy is recovering, but for whom it is recovering. For half a million households in negative equity and a third of a million in unemployment, it is hard to see reasons to cheer in the new year. Which is why the Government should now finish the job it started two years ago. It should never again rely on property or construction (this point needs repeating) but neither can the economy recover without those sectors, and 2014 is the ideal year to design and implement a thorough seven-year plan to get them back to normal.
And 2014 is ideal because it's 10 years since the insanity that caused the crisis began. While imperfect -- competitiveness had been eroded, property prices were modestly overvalued and construction mildly overextended -- 2004 was nonetheless the last year of sanity: government spending in 2004 remained below 40 per cent of GNP; house price growth was in modest single digits; and one in 10 of the workforce was working in construction -- high (the EU average norm is one in 14) but reasonable given large infra- structure spending and a growing population.
It was the insane "Inchydoney" era from 2004 on that drove credit and house price growth into double digit rates, public spending up by 50 per cent in just four years and bank lending to double over the same period.
So 10 years on is a good time to take stock. And action. And while bank and government debt remains high by EU standards, Ireland's population growth -- and the fact that our population is much younger than the EU average -- ameliorates this. Younger, growing countries have more justification to borrow than declining older ones. Bank legacy debt aside (hopefully it can be resolved with our EU partners) and some excessive private debt aside (this is being restructured), current debt levels are not an excuse to keep our growing population (half a million in the last 10 years) trapped in negative equity and rabbit-hutch accommodation.
Far from being imprudent, a plan to get construction employment, housing activity and house prices back to sensible prudent levels is advisable if not necessary.
Take construction employment, for example. Were we at EU levels here, roughly one worker out of every 14, or about 140,000, would work in our construction sector. At barely 100,000 we are 40,000 below that level and, as mentioned above, our younger, faster-growing population means we need to build relatively more in the next few years (from 4.31 million in 2007 our population will, according to CSO projections and despite seven years of downturn, hit 4.65 million this year and keep rising).
The reality of ghost estates and overbuilding in the boom seems to defy the idea that we need more construction workers. But no one is talking about returning to boomtime construction employment levels (which peaked at around 290,000). However, a prudent figure of between 150,000 and 180,000 is a reasonable target for the next seven years. Raising capital spending from a currently low level of 1.5 per cent of GDP to around 4 per cent will help reach this target.
Now, let's look at house prices. At roughly two-thirds of 2004 levels and half 2007 levels, some economists believe -- looking at the US market --that current levels are as good as it gets. Last year ratings agency Fitch agreed and predicted a 20 per cent fall in prices this year. But Fitch's analysis was based on crude macroeconomic comparisons with the US that ignore fundamental differences between Irish and US markets. For that reason and others, they have been proven wrong: Ireland's population dynamic means that while prices should certainly not return to 2007 levels for the next decade, a prudent balance between extreme highs and lows can and should be targeted.
Here, the Government can help itself and the economy by reversing an imprudent and ideologically driven cut in mortgage interest relief. After years of scapegoating and punishing them for a crisis they never created, it is time for the Government to get on the same side as struggling home owners. By the way, the idea of taxing tracker mortgages should be cut off at the knees.
The damaging impact of the property tax should be compensated for by prudent tax incentives for mortgage owners. And, no, it was not tax reliefs that caused the crisis -- it was bank credit that did that. The mistake of going from excessively lax lending rules to overly restrictive ones should also be avoided. Between the very low 14,000 mortgage drawdowns in 2012 and the insanely high 110,000 in 2006, a medium level of 40,000 should be targeted.
For some, the construction and residential property sectors of our economy were pantomime villains who caused the global crisis. For that reason, and perhaps some added spite and incompetent ideology, they think home owners should suffer in permanent financial limbo of negative equity debt and crushing taxes. But home owners are victims, not perpetrators, of a crisis caused by bad regulation and inept local and national government management of the property market.
This new year is a time to replace ignorance and prejudice towards the property market with common sense and fair play. By allowing prices to find a happy medium, negative equity can be eliminated or eased enough to get people spending again.
Last December, the Gov-ernment set out a plan for the macroeconomy between 2014 and 2020. This is a good start. Now let's follow through with a plan for property and construction.
Marc Coleman presents 'The Marc Coleman Show' each Sunday from 9pm on Newstalk 106-108fm